George Osborne has been accused of driving hard-up people into the arms of payday lenders after delaying jobless benefit payments.
The Chancellor used Wednesday's spending review to announce that people who have lost their job would have to wait seven days before they can claim unemployment benefit.
Charities branded the move a 'food bank first' policy.
Fiona Weir, chief executive of lone parent charity Gingerbread, said: "We know that any delay in benefit payments is crippling for single parent families.
"With an additional seven-day wait, we fear many more will be forced to rely on food banks and payday loans to make up the new shortfall."
Labour has refused to say whether it would support the controversial move.
The row came as payday lenders were referred for a full-blown investigation by the Competition Commission because of "deep-rooted" problems with the industry.
On Thursday morning, Osborne rejected the link between the benefit change and payday loans.
He said: "I do not accept..that welfare reform is payday lending."
The Chancellor criticised the high interest lenders and backed the probe by the commission.
The Office of Fair Trading (OFT) said it decided to make the referral because it continues to suspect that features of the market "prevent, restrict or distort competition".
The "fundamental" problems it has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said.
The Office of Fair Trading (OFT) decision is the culmination of a large-scale investigation into the £2 billion payday sector, including spot checks on household names such as Wonga.
News of the probe was welcomed by Citizens Advice chief executive Gillian Guy.
“Payday lenders are recklessly quick to hand out loans meaning proper checks fall by the wayside.
"Lenders should not be competing on how quickly they can get cash into a borrower’s bank account," Guy said.
Lenders are not taking the time to assess whether payday loans are suitable for customers, she said.
“Payday loans are quick to take out but often aren’t as easy to pay back, often leading to serious financial troubles.
"Debts quickly spiral out of control as those struggling to repay are hit with high interest rates and charges.
"The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market.”
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